Mad dog's bar was quiet last Friday. The only sounds emerging from this isolated drinking den on the Caribbean island of Virgin Gorda were the crickets, the occasional buzz of a mosquito and the sound of Chuck Berry classics being piped through an old stereo. It is hard to believe that six days earlier this dimly lit outpost, with its flimsy walls lined with Seventies pulp fiction covers, bore witness to an evening that ended in bloody murder.

Virgin Gorda is the second largest island in the territory of the British Virgin Islands (BVI). This small group of islets east of Puerto Rico has a population of 22,000, with 9,000 people living in the capital city. The islands are a rich mix -part holiday paradise, part tax haven home for offshore companies and part home to drug runners who deal cocaine to Colombia. Americans are known to spend $2.5 million on state-of-the-art villas lining the island's bays. White expatriates rub shoulders with 'down islanders', expatriates from the East Caribbean, and those born locally.

Any delicate harmony was disrupted last Sunday when local businessman Vincent Connolly, after a night spent drinking at Mad Dog's, was discovered dead outside his home. His death, and other recent murders, have upset the area's peaceful reputation.

Last Saturday night, Connolly, 50, reportedly played saxophone for several hours for other regulars at Mad Dog's. He stumbled out on to the dirt track that doubles as a car park leading up to the bar, climbed into his blue Ford truck and set off on the short drive home to Windy Hill on the island's east coast. On the way, traversing the southern portion of Virgin Gorda, he would have passed a series of luxury apartment complexes. No one saw him followed home. Police said the killer waited for Connolly to emerge from his vehicle, then shot him four times. The victim was found in a pool of blood by his landlady the following morning, his saxophone at his side.

Last week, several people emerged as suspects in Connolly's killing. It is no secret on the island that the businessman, while liked for his musical talent and general bonhomie, racked up a number of enemies. One description of him ran: 'Stocky and built like a brick shithouse. You wouldn't want to get on his bad side.' His friends variously described him to The Observer as 'aggressive' and a 'Jekyll and Hyde' character..

The detective leading the investigation , Inspector Tony Noble, has ruled out the possibility of a gang-related murder and any connection between Connolly's murder and the two others that occurred on the islands this year, the killing of Vere Brown Jr. and Dorcas Elizabeth Rhule. The latter was thrown off a balcony by three Jamaicans in a botched attempt to derail a trial. The murder was a case of mistaken identity, as it was Rhule's flatmate who was due to testify against the trio, a gang of robbers.

Noble's investigation began by focusing on a number of altercations Connolly was alleged to have had at work. The Salford-born expatriate was employed as a project manager by the Little Dix Bay hotel, a luxury resort built in the Sixties by Laurence Rockefeller. The apartment complex, north of Connolly's home, sits beside its own bay. Timber-framed chalets clad in local stone are interspersed with fake waterfalls and 'entertainment areas' comprising high definition televisions and views of an azure sea. Connolly was rumoured to have had disputes with contractors working on renovations and a new gym here. The police claimed various people had been laid off without payment, but no arrests have been made.

Investigators are now following a different lead. Last Friday a 'friend' of Connolly's contacted the local newspaper, the BVI Beacon, with new evidence. In an email typed in faltering English, the author, a woman, claimed to be 'a long time friend of Vinny when he was in the UK'. The individual says that Connolly contacted her a week ago saying he was 'worried about staying in the BVI'. This was because 'his life had been threatened by a local man'.

According to the anonymous correspondent, Connolly mentioned that his problem involved a St Lucian cleaner. The friend continued: 'Her local boyfriend had threatened him at his home and on the street to kill him on more than one occasion. Vinny was desperate to get away but his commitment to his job prevented this.' The email was seen only by reporters at the Beacon before being passed on to the police.

It gained significance and credence when a close friend of Connolly's, without mention of the email, told The Observer that it was rumoured Connolly had 'become involved' with a cleaning lady in her late thirties. He said that Connolly had come to see him the week before his death looking 'flustered and preoccupied'. 'He turned up quickly, said, "I've got to get out," before taking a telephone call and rushing off,' the friend said.

Chief Inspector Julien Donovan, who is aiding the investigation team on Virgin Gorda, added that Connolly was involved in an impending court case over a bar room brawl that took place last year.

Despite the allegations and counter-allegations, the reasons for Connolly's death, when discovered, will do little to mitigate the impact the incident has had on his family and friends. Connolly's wife Janet was described as being 'extremely distressed'.

Rose Giacinto, who runs the Chez Bamboo restaurant and Bath and Turtle bar, where Connolly sometimes played music, said the murder would inevitably affect tourism. 'People couldn't even believe there was a gun here on the island,' she said, sitting beneath the low ceiling fan and endless rows of black-bottled Paradise rum. 'I think people will start locking their doors.'

The fact that Connolly's murder is the first on the island in seven years is in part thanks to a successful local economy. BVI's head of state is the Queen, represented by a local governor, although significant power lies with a locally elected head of government. This gives the country the funding benefits of having links to the UK married with a degree of autonomy. The Islands' adoption of the US dollar, which as its legal currency is stronger than currencies used by most neighbouring states, makes it one of the most buoyant economies in the Caribbean. Because people are not allowed into the country without a work permit, there is little unemployment, and locals get preferential treatment when it comes to jobs.

Many of the locals' families have been on the island since the emancipation of slaves in 1834. This historical event is celebrated in ubiquitous murals daubed across walls on the cactus-lined avenues around the island. When the British left the Territory after emancipation, land ownership fell into the hands of those who remained, whose families have kept it ever since.

Added to this mix are the black expatriate community, mainly an immigrant workforce. They might work as doctors or lawyers, or in construction, as on projects such as the renovation at Little Dix, where there are new apartments being built. Accents hailing from everywhere from Grenada to Jamaica can be heard on the streets outside Buck's Market, Next Wave Designs, or Kaunda's Kysy Tropix, a local music store. Here, people hang out to catch up on the day's news, shoo hens, or admire the 50 metre-long yacht in the marina. All have come to benefit from the country's prosperity.

When the region became popular as a tourist destination in the 1970s, the benefits of land ownership for the local population shot into the stratosphere. Families capitalised on their holdings by selling piecemeal to developers and private individuals looking to build holiday homes This continues today. On Beef Island, close to one of BVI's principle airports, a Hong Kong developer is preparing to build a golf course and resort complex. The proprietor of De Loose Mongoose bar pays homage to Richard Branson's ownership of two islands north of Virgin Gorda, reportedly one for business - a resort is planned - and one for pleasure. Now, tourism is BVI's principle industry. There are few farms. Almost all food is imported from the US.

One white businessman described how there was a certain cache in being locally born. Not only were you likely to be rich, he claimed, but you would almost certainly not have to work. He added this often bred antipathy between Caribbean expatriates and locals. He even suggested that the apparent success of Connolly, an affluent white expatriate who it is alleged could be unwittingly abrasive, might have contributed to his death. 'This may well have aggravated black locals used to getting their way,' the source said.

That Connolly's death, if not directly racially motivated, may well have been catalysed by latent social tensions, is something the authorities deny. 'We are very conscious of the racial mix we have here in the BVI,' David Pearey, BVI's governor, told The Observer. 'To the greatest possible extent it works very well. Disparities in wealth always cause problems, and that's something the authorities need to be conscious of. But BVI, as the records show, is a tranquil, peaceful, law-abiding country. Our different communities get on well,' he said.

However, many believe the authorities turn a blind eye to criminal behaviour in some circles to preserve peace in others. Scott Bronstein, assistant editor of the BVI Beacon, claimed the police ignored local involvement in cocaine smuggling because they wanted to avoid more organised, dangerous outfits from countries such as Colombia coming to the territory. As such, he claimed, drug crime was prevalent in the BVI. Despite a recent crackdown, marijuana is widely available and it is legal to consume hallucinogenic mushrooms. The islands are a major conduit in the cocaine route between South America and the US. Around $2m of cocaine was recently found being transported through the islands. St Croix, a short journey to the south, has a bad reputation for narcotic crime. Any of this could have influenced the death of Connolly. In Noble's words: 'The police are not ruling anything out.'

Back at Mad Dog's, closing time is approaching. The hatches are being battened down, the fake carving of a conquistador locked up after another day of being pelted with beer, sweat and the November drizzle that is blanketing the island. It is business as usual for the bar's owner, Steve. 'I liked the guy and that's it,' he said abruptly, when the issue of Connolly is raised for the umpteenth time. For the time being, the island's prosperity wins through. At least until the next time the peace is punctured.